Value chain analysis IT outsourcing sector Egypt 2020

IT Outsourcing consists of a range of IT-services; the main topic of this report is application outsourcing, such as software support and custom application development. Thousands of Egyptian IT companies are active in this field and are working for domestic clients. Hundreds of Egyptian firms are also offering these services to foreign markets, especially to clients in the Gulf region (GCC). The European markets are served on a much more limited scale.

The Egyptian IT sector was already becoming interested in exporting its services to foreign markets around the year 2000. As a matter of fact, also in the year 2000, CBI started to support a small number of Egyptian IT companies. This was, however, in a very early ‘infant’ stage; providing outsourcing services to foreign clients became more common around 2008. Up until 2011, Egypt had a fast-growing IT export industry, primarily focused on serving clients in Europe and the Middle East. However, the political turmoil of 2011-2013 negatively affected the outsourcing sector. In recent years, the industry has shown growth again.

Because of the growth for outsourcing in the main export markets, the outsourcing sector in Egypt is expected to grow over the coming years – provided the internal political situation does not deteriorate.

The current Egyptian IT exports are valued at around EUR 712 million, creating a total of 161,000 jobs.

The United States and European markets are the key markets for outsourcing services, while the market share of Europe is around 30% of the worldwide market. The European market for IT outsourcing is also expected to grow over the next three years. Any company from a specific country, including Egypt, that can deliver either sector or domain competencies, has a distinct advantage in Europe. It is important to specialise in something specific and remain one step ahead. Egyptian IT companies have experience with several of the new trends, such as big data, mobile application development, Internet of Things and Virtual and augmented reality.

Companies in Europe have been using foreign ITO suppliers for more than 30 years. India has been the pioneer and is still the market leader as an outsourcing destination, but projects have also been conducted in many other countries. A relatively limited number of service providers from the Middle East or North Africa are targeting Europe.

Egypt has potential to be a serious outsourcing destination, and the country has a number of strengths. It has invested in developing local physical infrastructure to provide better utilities and telecommunications connectivity. The available talent pool is a corner stone of Egypt's unique position among the global outsourcing destinations: out of the annual pool of 500,000 university graduates, nearly 50,000 have IT-related degrees. There is also the possibility of cost arbitrage, due to Egypt’s competitive labour rates and the floating of the currency.

Egypt has now a large number of IT firms, and those working for foreign clients mainly target the Middle East and North Africa region. Others have clients in Europe (even with local representations). While global services delivery operations have been mostly concentrated in Cairo, other large cities such as Mansoura, Asyut, Alexandria and Luxor also have well-developed local economies and provide access to large talent pools. Egypt is also one of the fastest-growing entrepreneurship regions in the Middle East and North Africa.

In the Value Chain, governmental organisations play an important role, such as the Ministry for Communications and Information Technology (MCIT) and the Information Technology Industry Development Agency (ITIDA) for spearheading the development of IT in Egypt. The Egyptian Information, Telecommunications, Electronics, and Software Alliance (EITESAL) is a private sector, non-profit entity of IT-related companies.

Dozens of multinational IT companies, such as IBM, Dell EMC and Microsoft, have invested in Egypt as part of their global operations. Most of these are American and are used as captive centres (working for internal clients). There are also European entities based in Egypt, such as Valeo from France or CrossWorkers from Denmark.

There are opportunities for the growth of Egyptian outsourcing services to Europe. European firms are increasingly becoming interested in outsourcing. A main reason is that the demand for IT professionals in Europe is very high, resulting in a shortage of staff. Cost reduction is another reason for clients to outsource to developing or emerging countries. Egypt has a specific advantage, compared with many other outsourcing destinations: it could be used as a gateway for European companies to larger export markets such as the Gulf region.

There are also key obstacles that hinder doing business with Europe. For example, Egypt is not well known in Europe as a potential outsourcing destination. For most Egyptian companies, exposure to European markets has been limited. Only a limited number of Egyptian firms are conducting systematic marketing and branding activities in Europe, or can make use of a subsidiary or marketing office.

For CBI, there are interventions and support activities possible in the Value Chain. CBI could consider support in the field of coaching and training, since many Egyptian SMEs have insufficient business and marketing skills to market their ITO services and to attract clients in Europe. There are currently barely any specific export trainings being offered in this field (except for a new export readiness training to be offered by EITESAL).

Since a main obstacle for Egyptian companies are the difficulties in penetrating European markets, CBI could consider facilitating a B2B matchmaking project, where the actual marketing is also done via external brokers and agents. CBI could also offer advice and support related to strategy and branding, including organising workshops in Egypt.

When designing the actual activities, the Market Systems Development approach will be taken into account. It should also be complementary to existing activities done by business support organisations such as ITIDA and EITESAL, while it is also important to evaluate similar activities that have been conducted in the past.

Note: impact of the corona crisis.

This report was compiled at the beginning of the coronavirus outbreak. This pandemic will have a serious economic impact, depending on several factors, including the duration of the lockdowns.

So far, the global IT sector has been less vulnerable than other sectors in the economy. Working from home is becoming standard, so other forms of remote work - including offshore outsourcing to foreign countries - will be less difficult to sell than in the past. In an economic recession, the number of (new) IT projects will decline, but because of the need of cost reduction, the interest in service providers from developing or emerging economies (including Egypt) could grow. Among this group, there will be a need for partners based in Europe, in order to improve their marketing and sales activities - also because of the difficulties in travel and personal meetings.